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Devolution and Economic Resilience in Nepal

Author

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  • Raj Kharel
  • Andres Rodriguez-Pose

Abstract

This article examines the impact of three key components of devolution — government expenditure, internal revenue, and both conditional and unconditional transfers— on the economic resilience of Nepal’s local governments during and after the Covid-19 pandemic. Bridging the gap between the devolution and resilience literature, it focuses on Nepal, a country that embarked on an ambitious devolution journey, transitioning to a Federal Democratic Republic following the monarchy's overthrow in 2008. This transition was institutionalised through the 2015 constitution, which established a three-tier system of government. The analysis reveals that, following fiscal devolution in 2017/18, local government expenditures and intergovernmental transfers significantly enhanced the resilience of rural and semi-urban municipalities. However, internal revenue collection has played a limited role in this process. In a country with low local-level capacity, conditional transfers — primarily allocated for infrastructure and services— have been crucial for local economic resilience, whereas unconditional transfers have not demonstrated the same impact. The findings suggest that greater investment, rather than autonomy, has been the primary driver of subnational economic resilience in Nepal.

Suggested Citation

  • Raj Kharel & Andres Rodriguez-Pose, 2025. "Devolution and Economic Resilience in Nepal," Papers in Evolutionary Economic Geography (PEEG) 2523, Utrecht University, Department of Human Geography and Spatial Planning, Group Economic Geography, revised Aug 2025.
    • Handle: RePEc:egu:wpaper:2523
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    Keywords

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    JEL classification:

    • H77 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Intergovernmental Relations; Federalism
    • H72 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Budget and Expenditures
    • H71 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Taxation, Subsidies, and Revenue
    • O23 - Economic Development, Innovation, Technological Change, and Growth - - Development Planning and Policy - - - Fiscal and Monetary Policy in Development

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